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For Bombardier, the light at the end of the tunnel might be a train

Bombardier
Bombardier
The Bombardier Zefiro has a top operating speed of between 250 km/h and 380 km/h.

For more than a month now, the news has been especially bad for Bombardier (Bombardier Stock Quote, Chart, News: TSX:BBD.B).

Midway through January, shares of the iconic Canadian company, which has been under pressure since 2011, began a fall that would see its market cap nearly halved.

The culprit was cash. Bombardier, warned analysts such as RBC’s Walter Spracklin, didn’t have enough of it, owing mostly to cost overruns on its CSeries jet.

On February 12th, outgoing CEO Pierre Beaudoin warned that the cost of the CSeries development program would rise from an estimated $4.4-billion to about $5.4-billion. The jets are now nearly two years behind schedule.

For investors, the news got worse when the company was forced last week to finance a nearly $1-billion equity offering at just $2.21.

The CSeries is a class of aircraft known as narrow-body. These are typically single-aisle, often single class, shorter haul planes that accommodate between 110 and 180 people. CSeries competitors include some of the world’s best-selling planes, including the Airbus A320 and the Boeing 737.

Today, some industry experts wonder whether the market for the planes that were once hailed as “game changers” will ever bear fruit.

“There’s going to be a huge bubble in narrow bodies, so those residual values are going to plummet, which is going to be a great buying opportunity for a carrier like Delta,” said Delta Air Lines CEO Richard Anderson at a luncheon last June in Washington.

On top of that, a recent drop in oil prices has changed the economics of the market.

“Given the widespread availability of cheap used A319s — and to a lesser extent, Boeing 737-700s — it’s hard to justify spending tens of millions of dollars more for a CSeries jet with jet fuel prices below $2. Even with 20% lower fuel consumption, it would take an extremely long time to save enough on fuel to justify the CSeries purchase price,” writes Motley Fool’s Adam Levine-Weinberg, who believes that Bombardier faces a “…long road to try to salvage the CSeries program”.

Is there any hope to rescue the company that began in 1937, when a Quebec mechanic named Joseph-Armand Bombardier dreamed of dreamed of building a vehicle that could “float on snow”? For Bombardier, the light at the end of the tunnel might be a train.

Bombardier is a leader in the manufacture of subway cars, high-speed trains, and locomotives. It makes up about half of the company’s business. And business is getting better.

“The worldwide population will increase from approximately 7.2 to 9.6 billion by 2050 together with a growing share of people living in urban areas from 54% to 66% in the same time period,” noted Bombardier’s most recent annual report. “Population growth and urbanization create an increasing demand for high capacity solutions for public transport especially in congested cities and areas.”

The company says it now has an order backlog of $32.5-billion owing to increasing activity in Europe, China, South-East Asia, and in India, where the new government plans to further the development of high-speed rail networks.

While the window may be closing before it ever opened for Bombardier on the business of narrow-body jets, rail appears to be newly invigorated.

A recent report from Frost and Sullivan predicted that rail in Africa, the Middle east and Latin America would double in size by 2023.

And the study says rail is on the cusp of historic achievements.

“By 2025, the first steps to connect Asia and Europe by HSR are expected to commence. A tremendous modal shift is also likely from highways to rail.”

Others have noted the there is unexpected sizzle is the rail business for the first time since anyone can remember.

“We’re in the midst of the railway renaissance,” says Morningstar analyst Keith Schoonmaker. “It seems strange that for this 150-year-old industry, the turnabout would be so recent, but it’s true.”

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About The Author /

Nick Waddell
Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.

Comment

  1. The question is whether the ailing aerospace business will drag down the successful train business.

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